When the Minimum Wage Goes Up, the Menu Price Also Rises

Supporters of a higher minimum wage applauded Gap’s decision last week to increase hourly pay. While Lynn Albright, vice president of the company’s Old Navy brand, told CNN that higher prices won’t be needed if costs can be lowered by, for instance, reducing staff turnover, the effects of such decisions often trickle down to customers.

In the restaurant industry, some chains have already prepared to boost menu prices in response to minimum-wage changes in such large markets as California, New York, and Washington. At the national level, Congress and President Obama continue to grapple with increasing the federal minimum wage; progress could bring similar hikes at eateries across the country.

Restaurants are a large low-wage employer, and industry executives have grumbled that wage increases—combined with additional costs resulting from the Affordable Care Act—are driving up the price of doing business.

To maintain profits, a number of chains have recently announced plans to partially offset the increases by passing them to consumers:

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• Jack In The Box expects the higher minimum wage in California—where it has about 40 percent of its restaurants—to reduce quarterly operating margins by 0.8 percent when it rises from $8 to $9 in July, Chief Financial Officer Jerry Rebel said in an earnings call last week. The state’s minimum wage will rise again, to $10, in 2016. To compensate, by 2015 Jack in the Box plans to increase menu prices either 1.4 percent just in California or a little less than 1 percent across all its restaurants. These higher prices would come in addition to any other price increases triggered by such factors as commodities costs.

• Cheesecake Factory operates about one-fifth of its restaurants in California, where it expects to sustain an additional $2 million to $3 million in costs from the state’s new minimum wage. This was part of the chain’s reasoning in boosting prices by 2 percent this year.

• Denny’s said it will plan on “an additional modest price increase” at its California restaurants in July, affecting about a quarter of the chain’s restaurants.

• BJ’s Restaurants, which has about half its units in California, anticipates that a 1.7 percent menu price increase will help cover the change.

• Nathan’s Famous said the state increase to $8 per hour, effective Dec. 31, 2013, amounted to a 4.6 percent average salary increase for affected employees. The company estimates that this will add 0.5 percent to the cost of sales if prices remain the same. The costs are clear, though the impact on menu prices is not.

The effect of raising the federal minimum wage to the proposed $10.10, compared to the current $7.25, would be more widespread.